Selling Rental Home, How Do I Avoid Taxes

Phoenix, Arizona
1031 Exchanges
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Selling Rental Home, How Do I Avoid Taxes

Jay Lee
Member since 2018 · 26 posts · 3 votes

Good morning,  

Needed your help and would appreciate thoughts.

Iam selling a rental home that has been owned for over 10 years located in Phoenix, Arizona.

What are my different options to avoid /defer taxes?  

I have done 1031 exchange before but was looking for other options to see if I could defer or avoid taxes legally but not have to buy and manage another rental property.

Thank you for your time.  Would appreciate thoughts and input! 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6mo

@Jay Lee, yea your best bet if you want to defer the tax is a 1031. @Bill B.provided some good options, but as @Mason Weiss said, there are passive opportunities that qualify for 1031 treatment and eliminate your responsibility to have to manage them.

NNN leases are a good option that will leave most of the responsibility to the tenant, but there are syndications that you can 1031 into, like DSTs (Delaware statutory trust).

These are completely passive and will allow you to defer all of the tax in an exchange. Once the project is complete, you could either 1031 into another DST or back into brick and mortar if you wanted, and continue your tax-deferred journey.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    6mo

    1031 basically your only option I am aware of. Seller financing could be a way to defer it as well. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6mo

    1) 1031

    2) “lazy 1031” (Sell, buy something else, then do a cost seg. Problem is you’ve given up all future depreciation you could have taken, avoid if possible.)

    3) Get a cashout refi and let a property manager run it

    4) Sell it for less than you paid minus any depreciation

    5) Die

    Ps. You could move back in for 2 years to qualify for the owner occupied for 2 of the last five years. But with 10 years of rental history prior to your occupancy, onl 2/12th (1/6th) would be tax free and you’d still owe all the depreciation recapture.  Which might be higher than your “taxes”.  Don’t forget, whichever state has the highest state income tax is going to want their bite too.  Selling costs  tacked on and you could easily be looking at 30-40% plus depreciation recapture. 

    Pps. For the morbid readers…6) Lose it in a divorce/lawsuit. 

    2Reply
  • Mason WeissBusiness Member
    Realtor · Phoenix, AZ · Member since 2021 · 523 posts · 239 votes
    6mo

    Hey Jay, you could 1031 your property into a more passive syndication with a professional company. I know many who do this as they get closer to retirement and no longer want the headaches of personal management.

    [email protected]480-818-7745
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6mo

    @Jay Lee, yea your best bet if you want to defer the tax is a 1031. @Bill B.provided some good options, but as @Mason Weiss said, there are passive opportunities that qualify for 1031 treatment and eliminate your responsibility to have to manage them.

    NNN leases are a good option that will leave most of the responsibility to the tenant, but there are syndications that you can 1031 into, like DSTs (Delaware statutory trust).

    These are completely passive and will allow you to defer all of the tax in an exchange. Once the project is complete, you could either 1031 into another DST or back into brick and mortar if you wanted, and continue your tax-deferred journey.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • Elaine Park
    Accountant · Chicago, IL · Member since 2026 · 11 posts · 21 votes
    6mo

    CPA here. Since you want to avoid buying another property, look into an installment sale under Section 453. You seller-finance the deal and spread the gain across the years you receive payments instead of taking the full hit in one year. After 10 years of depreciation the recapture alone is taxed at 25%, so stretching payments out can keep you in lower brackets and reduce the overall tax bill. Worth having your CPA run the numbers both ways.

    1Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    6mo
    I’d work with a cpa to sell what your actual gain is. Many times, investors have passive losses From previous years that can offset a chunk of that gain. As far as options, there’s a lot to consider. 1. Sell the property and pay and tax 2. Sell this property, buy another property before the end of the year, make sure the asset is placed in service and then do a cost seg to accelerate loss. 3. 1031 exchange (accomplishes the same objective as #2). 4. Seller financing - as others have said, it spreads out your gain. However, depreciation recapture is picked up in year 1 with the rest of the gain being spread out. 5. DST/syndications - this would be if you’re looking for a more passive endeavor. Have you cpa model out these scenarios prior to selling.
    [email protected]
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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes
    6mo

    @Jay Lee, hi. Good question. Once you sell, the main issue is capital gains + depreciation recapture.

    If you don’t want another rental, a few options to look into:

    • Delaware Statutory Trust (DST) → still 1031-eligible but passive
    • Opportunity Zones → defer + potentially reduce gains
    • Installment sale → spread taxes over time
    • Primary residence conversion (if timing works)

    Each has trade-offs, so it really depends on your goals (cash flow vs tax deferral vs simplicity). A quick strategy review before selling can make a big difference.

    0Reply
  • Brett P SwartsPro Member
    Specialist · SAINT AUGUSTINE · Member since 2017 · 270 posts · 27 votes
    6mo

    Here’s how the three strategies compare:

    1. 1031 Exchange
    Great for deferring taxes if you want to stay fully invested in real estate.
    But it comes with pressure:
    • 45-day identification window
    • 180-day closing deadline
    • “Like-kind” requirement
    • No liquidity without triggering tax

    2. Deferred Sales Trust (DST)
    Designed for flexibility and timing control. Really makes sense if you have a $1M net proceed or better and $1M gain. 
    • Defer capital gains taxes on real estate, business, stock, primary home or bitcoin
    • Convert illiquid assets into diversified investments
    • No timing pressure
    • Create income streams tailored to your goals
    • Invest at anytime beyond real estate and/or back into real estate (passive or active) or your own business venture (my favorite part) 

    3. Delaware Statutory Trust (DST)
    A passive real estate option within a 1031 exchange.
    • Hands-off ownership
    • Institutional-grade properties
    • Still subject to 1031 rules and timelines
    • Limited control and liquidity - can be large fees

    The Bottom Line:
    • 1031 = Tax deferral with restrictions
    • Delaware DST = Passive 1031 option
    • Deferred Sales Trust = Tax deferral + flexibility + freedom

    The real question isn’t just how to defer taxes…
    It’s how to create freedom with your capital based on what matters to you the most.

    0Reply
  • Patrick O'SullivanBusiness Member
    Property Manager · Phoenix, AZ · Member since 2024 · 523 posts · 194 votes
    6mo

    @Jay Leeif you don't want to buy and manage another property, there are a few ways to defer taxes. You could do a 1031 exchange into a passive investment like a Delaware Statutory Trust (DST) or a NNN lease property. Another option is an installment sale or seller financing, which spreads your gain over several years. Opportunity Zone investments are also worth looking into, as they can defer and sometimes reduce gains. Each option has trade-offs in liquidity, control, and complexity, so it's a good idea to run the numbers with a CPA before deciding which approach works best for your goals.

    [email protected]480-795-7938
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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5mo

    Hey Jay, a little late here, but you’ve already gotten some great input so far.

    As others mentioned, a 1031 exchange is likely your strongest option if your primary goal is to defer taxes. But based on what you mentioned about not wanting to buy or manage another property, an installment sale (seller financing) could be a really solid alternative. It allows you to spread the tax liability over multiple years without jumping back into active real estate.

    Another angle to consider is whether the property itself is still a good investment and the main issue is on the management side, it might be worth holding on to it and bringing in a property management company. From a tax standpoint, those management fees are deductible, which helps offset some of the rental income, and you keep the long-term appreciation and depreciation benefits.

    At the end of the day, it really comes down to what you want your portfolio (and time commitment) to look like moving forward.

    Definitely worth sitting down with your CPA to map this out based on your full picture and long-term goals, there may be opportunities to combine a few of these strategies depending on your situation.

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
    2mo

    Since you've done a 1031 before and want to skip buying and managing another property, a few of the ideas mentioned above are worth a closer look. An installment sale, where you seller-finance the buyer, lets you spread the gain out over the years you actually collect the payments instead of taking the whole tax hit in the year of the sale, which can help keep you in lower brackets. If you'd rather stay inside a 1031 but go completely hands-off, a Delaware Statutory Trust is still 1031-eligible but fully passive, so you defer the tax without being a landlord again. And it's worth pricing out simply keeping the property and putting a property manager on it, since those management fees are deductible and you hold on to the long-term appreciation and depreciation. The right mix really comes down to your numbers and goals, so have your own CPA model these out before you sell.

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  • Jim G.
    Investor · Bay Area, CA · Member since 2017 · 85 posts · 35 votes
    1mo

    haven't been on this forum for a while, I am reading just to catch up and formulate my real estate exit strategy.  I don't understand this part, would you explain @Bred P Swarts

    2. Deferred Sales Trust (DST)
    Designed for flexibility and timing control. Really makes sense if you have a $1M net proceed or better and $1M gain.
    • Defer capital gains taxes on real estate, business, stock, primary home or bitcoin
    • Convert illiquid assets into diversified investments
    • No timing pressure
    • Create income streams tailored to your goals
    • Invest at anytime beyond real estate and/or back into real estate (passive or active) or your own business venture (my favorite part)

    0Reply
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